Oil back below $40

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LONDON (Reuters) -- Oil fell more than $2 to below $39 a barrel on Monday, dragged down by growing evidence that recession is reducing global energy consumption.

The decline came despite news that Saudi Arabia planned to cut output to below its agreed target, as well as gas supply disruptions in Europe as a result of the Russia-Ukraine dispute and tensions in the Middle East.

By 8:35 ET, U.S. light crude for February delivery fell more than 6% or $2.58 to a low of $38.25.

U.S. jobless data on Friday set the tone for the market.

A U.S. government report showed employers slashed jobs by 524,000 in December, driving the national unemployment rate to its highest level in almost 16 years.

"The U.S. unemployment numbers on Friday started the latest leg downwards. We have had a string of bad news, with companies and economies all reporting negative data. It is almost relentlessly bad," said Rob Laughlin, senior oil analyst at MF Global in London.

Oil prices fell 54% last year and have shed more than $100 from a record peak of above $147 a barrel last July as the global economic downturn hits demand for fuel.

The world's top oil exporter, Saudi Arabia, plans to cut output by up to 300,000 barrels per day (bpd) below its agreed OPEC target, a proactive step to prop up a collapsing market, industry sources said on Sunday.

Riyadh has already lowered supply this month to 8 million bpd, meeting its target under OPEC's pact to reduce overall supplies by a record amount from Jan. 1.

Saudi Arabia's cutbacks add to similar moves earlier this month by other OPEC producers including Iran, the United Arab Emirates, Kuwait and Libya to curb supplies, although evidence that oil producers are cutting output has not lent much support to prices so far.

Iran's representative to OPEC was quoted as saying that the group could decide to reduce oil output again at its meeting in March if crude prices fell further.

The front months on oil futures have been taking the brunt of the falls with the markets in steep contango. March U.S. crude futures have been trading at a premium of more than $5 above February, while April is around $3 above March.

Traders say the wide price spread partly reflects a lack of prompt demand but also a view that OPEC cuts will eventually start to impact the market and support prices.

Also worrying the oil market was the status of a deal to restore Russian gas supplies via Ukraine to Europe

In the Middle East, Israel leaders trying to find a knockout blow for Hamas militants defying a 17-day-old assault have thrown army reservists into the battle.

Although the Russian-Ukrainian gas price row and Middle East tensions could help push oil prices higher, analysts said any rebound was expected to be short lived.

Goldman Sachs Commodities said in a research note on Friday that a market surplus was expected to drive inventories higher and put pressure on its forecast oil price of $30 a barrel for the first quarter of 2009.

But it maintained its forecast that oil would recover to around $65 per barrel by the end of this year as the market rebalances in the wake of the global recession.